Government support for bioenergy in Finland. The forest industry dilemma

Transcription

1 Government support for bioenergy in Finland The forest industry dilemma Mats Lindström Energy economics and policy Spring 2011

2 Contents 1. Introduction Bioenergy in Finland Finnish energy production and industry Renewable energy goals Feed-in rate Energy production from biomass Effects on the pulp industry Effect of the feed-in rate on the wood use Wood supply Wood prices Total forest-based resources Conclusion References... 20

3 List of acronyms CHP Combined heat and power FFRI Finnish Forest Research Institute FMI Finnish Ministry of Industry IEA International Energy Agency TRCF Technical Research Center of Finland

4 1. Introduction Concerns about the climate change have resulted in political actions to mitigate the CO 2 emissions in order to prevent global warming. Especially the EU has been pushing CO 2 related energy policies forward and set renewable energy goals for its member countries. These energy policies, both national and international, are affected by the gains and losses a specific country get from them, which has been seen for instance in the validation process of the Kyoto-protocol.(NY Times 2001 and FRI 2010) In a corresponding manner, also the Finnish government has to take its national industry structure into notice when shaping the national energy policies (Tekniikka ja talous, 2007). For EU member countries the main goals for decreasing green house gas emissions are set by the EU, but in addition the member countries are allowed to further subsidies renewable energy technologies. In Finland this has been done through the creation of feed-in rates for renewable electricity generation, and through energy taxation policies favoring renewable energy production. The energy production mix in the EU countries is very heterogenous, and Finland and its neighbor country Sweden are the only two countries in Europe, for which energy from biomass constitutes for a considerable amount of the total energy production (IEA 2010). This is understandable, while forests cover 66% of the land area in Finland (Ericsson 2004), and Finland hence has a large biomass supply. It is also the reason why the Finnish government wants to support the use of bioenergy and especially the use of wood-based energy. The aim with this paper is to look at the feed-in rates for wood based energy from a resource-based view. The annual amount of forest biomasses is limited due to the limited growth, and the energy production units might hence have to compete with other users for their raw material. In Finland the largest use of wood takes place in the pulp 1 and paper-production, where process side-streams are used for energy generation. (FFRI 2011) This industry has strongly opposed the subsidies for wood burning, claiming that they will not increase the renewable energy production as expected (Finnish Forest Industry 2011). This criticism will be further evaluated in this paper to examine to what extent the feed-in rate is beneficial for the bioenergy use in Finland. 1 Pulp is the main raw material for paper and paperboard production. It is a cellulosic material obtained through the disintegration of the fibers in wood and other biomasses.(gullichsen and Fogelholm 1999)

5 2. Bioenergy in Finland 2.1. Finnish energy production and industry In 2010 the renewable energy production Finland corresponded to about 25% of the total energy consumption in Finland (Statistics Finland), which can also be observed in Figure 1 offered by the International Energy Agency (IEA 2010). Of this share, the wood based energy constituted for 85%, which is about 21% of the total energy consumption. Further examining this share, one can see that an important part of the Finnish production of renewable energy takes place in the pulp production of the forest industry, which is shown in Figure 2 (FFRI 2011). It is however important to observe that these values and fractions are calculated on the total energy, and hence no difference is made between electricity and heat production. In the pulp production sector of the forest industries, the wood is disintegrated into fibers to enable the manufacture of paper and board. A part of the disintegrated wood material, mainly lignin that binds the fibers together, cannot be used in the paper production, and is hence burned in a recovery boiler, as described by Gullischsen and Fogelholm (1999). The recovery boiler recovers the chemicals used in the disintegration process, as well as generates heat and electricity from burning the wood substances. The heat is mainly used as process heat, but low temperature heat can also be used for district heating. Part of the electricity is used for covering the pulp plants own consumption, while the excess of electricity is sold generating additional revenue to the pulp manufacturer. The supplied amount of excess electricity production capacity varies with the type of the boiler.

6 Fig 1. Energy production from different sources in Finland from 1972 to 2009.(IEA) 18.6% Renewable energy production in 2009 in Finland 14.4% 0.3% 30.1% 36.5% Forest Industry Heating and Power Plants Small scale combustion of wood Hydro Power Other Fig 2. Fractions for different sources of the Finnish renewable energy production in (FFRI 2011)

7 The pulp production is in this case interesting while its energy production in 2006 accounted for as much as 42% of the total renewable energy consumption in Finland, corresponding to about 10% of the total energy consumption (Statistics Finland). In addition, the main raw material in pulp production is wood, accounting for about half of the cost per produced pulp unit, which makes the wood prices an important issue (Fordaq 2010). From the wood supply in Finland, the most expensive quality, the saw wood, is used in the saw industry. The pulp industry uses pulpwood, which is wood of a medium quality. Low quality wood and logging residues are used for energy production (FFRI 2011). Despite the different raw material preferences, the pulp industry can use partly the same raw material as biomass fired plants in Finland, although the biomass fired plants in Finland mainly concentrate on logging residues and thinning wood not suitable for pulp production (Finnish Forest Industries) Renewable energy goals The EU (2008) has set a national goal for the Finnish energy production according to which, the renewable energy production should reach a value of 38% of the final consumption by the year of Calculated on the energy consumption in 2010 this means an increase with 13%, and it has been suggested by Technical Research Centre of Finland (TRCF 2011) that this increase would constitute for a capacity need of 38 TWh of new capacity until This need of new renewable energy production capacity is why the Finnish government has been reshaping its energy policies. The burning of biomass is due to the large supply thought to be one possible option to reach this goal. It is for instance suggested that forest biomasses could be a substitute for a part of the coal fired power plants, constituting for 12.9% of the total energy consumption in In already existing coal fired power plants a part of the coal is suggested to be substituted for biomass, while the new capacity is suggested to be designed for biomass use only (TFCF 2011) Feed-in rate In the end of 2010 the Finnish government decided on the creation of both feed-in rates and fixed subsidies for renewable electricity production, which will be starting in the end of March The supported technologies are wind energy, biogas energy and wood based energy, and the goal is to increase the profitability, and hence support investments in new capacity. The fixed subsidy is given to all three technologies as well as to hydropower. In the

8 new law, the use of forest converted chips (chipped wood biomass from stem wood, logging residues and thinnings), are guaranteed a subsidy of 6.90 per MWh of produced electricity. Wood-based energy does not have a feed-in rate dependent on the electricity price, but there is an additional subsidy based on the price of greenhouse gas emissions credits. This feed-in rate has a maximum of 18 /MWh paid when the emissions credits for 1 ton of CO 2 - equivalent costs 10. It then decreases linearly to 0 at an emission credit cost of 23. (Finlex 2011) This approach is used in order to favor the use of wood based energy before the use of fossil fuels, and the feed-in rate are calculated based on quarterly average prices. The length of the feed-in rate is maximum 12 years for one specific power plant. In addition to the mentioned feed-in rates, the production is already indirectly subsidized through differences in taxation of energy production depending on fuels use, and also through the carbon emissions trade (Ericsson 2004). As the law has only been in effect since the end of March, there is yet no information available on the affect on investments or on fuel substitutions Energy production from biomass The biomass supply is, as mentioned, one of Finland's strengths, and a supply network for wood already exists due to the forest industry. The biomass available mostly constitutes from the forest, including logging residues, thinning and wood not suitable for industrial use. The creation process for the renewable energy feed-in rates did, despite the large supply, meet strong opposition from the Finnish forest industry, claiming that such feed-in rates would hurt its profitability and possibly lead to the shutdown of production capacity in Finland. The Finnish forest industry association is the main user of wood in Finland, and it considered the feed in rates as a severe threat to its pulp manufacturing sector, where the wood-use constitutes for over 50% of the total expenses. The Finnish Forest Industry Federation suggested that this policy change would increase the prices of wood dramatically, forcing the shut-down of several pulp manufacturing plants in the country. The association further pointed out that as forest industry is the major producer of renewable energy, this policy change might lead to a decrease instead of an increase in renewable energy production. (Finnish Forest Industries 2011) Indeed Forest industry companies already shut down 3 pulp plants in the last decade, partly due to increased wood prices. (Metsäliitto 2009)

9 The Ministry of Industry showed concern (FMI 2011) about the forest industry association complains, partly as the industry is of great importance for Finland, while it is suggested to employ about people directly and indirectly. This is a considerable amount compared to the whole population of 5.2 million people (Finnish Forest Industries). Considering the fact that the Finnish government is keen on retaining the competitiveness of the domestic pulp industry due to its high importance for the Finnish industry, it is interesting to look more into depth on how the new feed-in rate will affect the production of wood-based energy, as well as the possible effects on the pulp manufacturing industry. The key issues in this analysis are the supply and the demand of wood, determining the price paid by the users.

10 3. Effects on the pulp industry 3.1. Effect of the feed-in rate on the wood use There is little information available on Finnish producer prices for different energy source, but the Technical Research Center of Finland (TRCF 2011) has done annual estimations comparing the total costs for a CHP plant using both biomass and coal. These plants do not currently profit from the feed-on rates, but there have been suggestions to include them in the future. The calculations were made on a plant producing 115MW of electricity and 230MW of district heating, which is suggested to be a somewhat typical plant in Finland. For a coal fired power plant the annual cost was about 45 Million, while about 47 million for a plant using 70% coal and 30% of dried and chipped wood biomass or logging residues. The use of biomass is hence not profitable in this case, and the feed-in rates would be needed also in this case. When examining the feed-in rate and constant subsidy for wood burning power plants we can use Figure 3. This figure illustrates the placing of coal and wood fired energy production on the marginal cost curve as suggested by TRCF (2011). Because of the lower marginal cost for the use of coal-based energy, this capacity is utilized before including the use of the more expensive wood based energy. The figure does only compare coal- and wood-based energy, and the marginal cost is assumed to be constant for each of them. The feed-in rate should aim at changing the order of use between purely coal fired and biomass and coal fired power plants, to achieve a switch from wood to coal in case of a sub maximal use of the energy production capacity as for the demand level D1 in figure 2. When the demand is at level D1, according to law of supply and demand, only coal fired capacity is used, while at D2 the whole coal fired capacity plus a part of the coal and wood capacity is used. Hence, if the government want to optimize the situation to achieve a higher use of bioenergy, the feed in rate should be set so that energy (heat and electricity) produced by biomass is just below the price of the fossil fuel based energy. However, as the price of coal-based energy is unaffected, one could suggest that the feed-in rates would lead to an increased energy usage at demand levels corresponding to D2 in the figure. This might be the case as the feed-in rate lowers the marginal cost at this particular demand quantity.

11 Price P(wood) P(coal) D1 D2 Coal Wood Quantity Fig 3. Assumed relation between the electricity production capacity from coal and wood in Finland before the feed-in rate, according to values offered by FFRI(2010). If the Finnish feed- in rate for wood based electricity generation is efficient this means that this would shift the position of the wood based energy to become more of a base load capacity. This should lead to new investments in wood fired CHP plants, as their profitability rises. Hence, according to these assumptions, also the wood demand should be increasing as an effect of the feed-in rate and the subsidy. It is however difficult to assess, whether this feed-in rate would make it profitable to burn also wood suitable for pulp production, but from available price statistics and estimated wood removal potentials it is possible to take a closer look at this problem. As about 40% of the wood consumption at a pulp plant is used for energy production, the amount of electricity and heat produced might be compared to that of a purely biomass fired power plant (Statistics Finland). Thus an appropriate assumption could be that the amount of produced energy from one unit of biomass in pulping corresponds to about 40% of the energy produced in a purely biomass fired CHP plant. Although this assumption does not take into account the possible efficiency differences originating from new technologies or other causes, or efficiency increases due to economies of scale. According to this assumption, the critic against the feed-in rates can be examined for a simplified case where the market for pulpwood is only national, and the forest industry is already operating at the maximum stable removal from the Finnish forests. If the only two players competing for pulpwood were the forest industry and the energy industry, and the forest industry wood use would be constant, then every additional unit of pulpwood used in a wood fired power

12 plant would increase the price of wood according to the law of supply and demand. Hence, the increase of one unit of wood-use in wood burning would result in the decrease of 0.4 units of wood-use in the energy production in the forest industry. According to this very simplified assumption, the critic from the forest industry seems to be correct at least at a basic level, but it needs to be further evaluated. One important factor that was not considered in the previous example is the features of the wood supply, and whether there is excess potential of wood supply available in Finland Wood supply The Finnish Forest Research Institute (FFRI 2011) analyzes the use of the Finnish forests on an annual basis. When examining Figure 4, which was published in their forest sector outlook for 2010, one can see that the annual removal from the Finnish forests, in the last ten years, has been at least 10%, or 10 million m3, below the estimated maximum sustainable removal. Hence, there should be an excess capacity available for use in wood fired power plants that is currently not used because of profitability issues or due to forests owners' valuation of their forest as a recreational area (Ericsson 2004). One could hence suggest that it from this point of view would be beneficial for Finland to reach the maximum sustainable removal in the future due to the renewable energy goals set by the EU. The currently unused potential of approximately 15 million m 3 can be converted into energy potential by assuming the average energy content of one m 3 of pulpwood. The FFRI (2011) uses a converting ratio of 2 TWh of primary energy content for 1 million m 3, which gives an excess potential of 30 TWh of primary energy content from wood. When knowing the primary energy content, we can use the average efficiency for wood burning CHP plants to calculate the available amount of secondary energy in the form of heat or electricity. The law on the feed-in rate for wood-based electricity production stated that the overall efficiency of the power plant has to be at least 50% for small plants from 100kW to 1MW. By using this value and neglecting additional efficiency losses due to logging or transportation, we obtain an approximate value of 15 TWh of excess potetntial.

13 Fig 4. Annual removal and maximum sustainable removal from Finnish forest from 1999 to 2009, including estimated values for 2010 and (FFRI 2011) One the other hand, since the wood market is international also the possible imports and exports should be examined in the scenario. Finland is currently a large importer of wood (FFRI 2011), which can be seen in Figure 5. When comparing the imports to the annual removals, it is interesting to see that before the closing of some Finnish pulp plants around 2008, as the wood use reached a peak, there were very high imports of especially pulpwood). These imports significantly decreased in 2009, partly due to export duties introduced by the Russian government in 2008, starting at 15 per m3, and further increasing to 50 per m3 in Compared to the total wood use, imported wood still constituted for a large share in 2009, but it is important to notice that the fraction of pulpwood has decreased since 2008.

14 Fig 5. Finnish imports of wood between 1999 and 2009, including estimated values for 2010 and The value of the y-axis is an index where the price in 2002 is set as a value of 100. (FFRI 2011) 3.3. Wood prices To get a better view of the supply structure we need to examine also the price changes of wood during the last decade, to see how the wood prices correlate with the quantities of used wood. Figure 6 (FFRI 2011) shows the price of saw wood on the left and pulpwood on the right, where the different lines are brown for imports and green for the national market price. The prices for imported wood are the prices paid at the border, including duties. The price correlation between the imports and the domestic supply of saw wood seems to correlate to some extent according to the figure. For pulpwood on the other hand there tends to be a mechanism in the system preventing an increase in pulpwood prices on the domestic market although the prices of imported wood increase dramatically. This can be seen as the large difference between the import prices and the domestic prices around 2008.

15 Fig 6. Monthly price indexes for sawlogs (left) and pulpwood (right) in Finland, were the imports are marked with a brown line, and the domestic supply with a green. (FFRI 2011) This issue can be further investigated by comparing the price elasticity of demand, while this should correspond to the elasticity of demand for the forest industry, as they are the main user of pulpwood in Finland. In the price elasticity calculations the arc elasticity is used as a measure of elasticity, and it is calculated with the formula (Wall and Griffits, 2008), (1) The values for point 1 and 2 are two on each other following years. Hence, the calculated elasticity of demand includes some variation due to the absence of a primary price and demand values. In this case, when the elasticity of demand is calculated from two on each following years, the elasticity of supply equals the elasticity of demand. The calculations are done separately for the demand of imported wood and domestically supplied wood. When comparing the values in Figure 7 we see that there is a significant difference in the forest industry's elasticity of demand for wood, when comparing import and domestic supply around This is confusing while there seem to be two separate markets for imported and domestically supplied pulpwood enabling different prices on different markets. In addition, the same Finnish forest industry companies are active on both markets, and in a perfect market one would suggest that there would be a competition for cheaper Finnish pulpwood increasing the prices and removing the arbitrage possibility. The elasticity differences might however, partly originate from the export duties on wood set by the Russian government,

16 while there might have been a lock-in on Russian wood due to already existing supply networks and contracts, forcing the Forest industry to continue the procurement of Russian wood while other import possibilities where inadequate. There might also be price differences due to quality differences in the pulpwood between the imports and the domestic supply, which are not seen in statistics. In addition the supplied quantity for a specific year might be affected by storms of other events causing an increased removal domestically or globally. It is despite these factors difficult to explain why the market price of domestic pulpwood did not follow that of the imports in 2008, especially when comparing it with the market for saw logs for which the mechanisms are expected to be quite similar, due to the similarity of the traded goods. Elasticity of demand for domestic supply and imports Imports Domestic supply Fig 7. Elasticities of demand calculated with the formula for arc elasticity. When examining this case it might be important to bear in mind that there in the end of the 1990s was a cartel in the pulpwood market (Tekniikka ja talous 2010), were the three large pulpwood users in Finland, Metsäliitto, Stora Enso and UPM, cooperatively decided on the consumer prices of pulpwood. This was possible as the buyers constitute of a few large players, while the Finnish forest ownership is very diverse, as about 60% of the forests are owned by private non-industrial owners (Ericsson 2004). These features resulted in differ-

17 ences in negotiation power between the suppliers and the buyers. One suggestion to the price difference between imports and domestic supply might hence be that the forest industry companies want to gain from their oligopoly structure in the wood market. This is possible if they succeed to keep a lower price at the national market by increasing their imports, and simultaneously prevent other buyers from entering the domestic market Total forest-based resources As pulpwood is suggested to be mainly used for paper production, the main feedstock for the wood-based power plants are logging residues and thinning. (Statistics Finland) One of the aims with the feed-in rate is to increase the usage of these in the energy production.(fmi) The available quantities of logging residues and thinning has been estimated by (Ericsson 2004) to amount of 34,7TWh. The law on the feed-in rate for wood-based electricity production stated that the overall efficiency of the power plant has to be at least 50% for small plants from 100kW to 1MW. Hence the potential of this wood residues and thinnings would be in the size of 17TWh. Comparing this value with that of the energy production from wood chips, which consists of both logging residues and low quality roundwood, which in 2009 was 10,8TWh (FFRI 2011), we get an additional capacity of at least 7TWh. Adding this to the already calculated excess potential from the annual maximum sustainable removal, we end up with a total annual value of at least 22 TWh of heat and electricity. When comparing this with the total expected value of 38 TWh, the new renewable energy capacity required by 2020 (FTRI 2011), we see that for the current situation there is a large additional potential of forest based energy available. The reason why these resources are not currently used might be due to low profitability or non-existing networks (Malinen 2001). Hence an increased price of wood used for energy generation might bring these resources to the market. As the marginal costs for these quantities are not known, no future prices for pulpwood are calculated in this paper. A simplified calculation can however be made for the decrease in demand of pulpwood from the forest industry. In Figure 7 we saw that the average elasticity of demand for domestic pulpwood was about We can now use this value to check how much the forest industries demand of pulpwood would decrease due to a specific price increase. This value can then be used as a measure for the decrease in the renewable energy produced in the forest

18 industry. An interesting issue would be to explore how a large increase of10 per m 3 would affect the forest industries demand. By rearranging the formula for demand elasticity (Wall and Griffits, 2008) we get, (2) When calculating with the values obtained for 2009 (FFRI 2011), 24.2 million m 3, and 81 per m 3, we get a decrease in demand of 2.2 million m 3. This corresponds to about 8% of the total demand by the forest industry in The values used for this calculation are very inaccurate, and the obtained answer is hence not very valid.

19 4. Conclusion The criticism presented by the Finnish forest industry is valid when such a competition between the energy and the forest industry about pulpwood would take place, which would increase the wood prices and force the Forest industry to cut its capacity. This would not be a sufficient way to increase the total quantity of renewable energy produced in Finland, due to the large energy production in the pulp sector, where about 40% of the wood is used for heat and electricity production. Opposite to the complains by the Forest Industry, the FFRI has estimated the supply of logging residues and thinnings to an amount sufficient to cover a significant amount of the biomass needed due to an increased demand. In addition the statistics also suggests that the annual removals during the last decade continuously have been about 10% below the maximum sustainable removal from Finnish forest, which further add up to an annual value of 22 TWh of potential forest-based secondary energy. In addition the price elasticity of the demand for the last decade shows that despite an increased price of imported pulpwood in 2008, this did not result in a price competition between the buyers of domestic pulpwood. A simplified calculation on the demanded quantity of pulpwood by the forest industry does however suggest that there might be a significant decrease the pulp production if the pulpwood price increases. In this analysis the changes in the global wood market have been neglected, and as Finland in 2009 imported almost 10 million m 3, similar energy policy actions in its neighbor countries might affect the domestic wood prices in Finland. Furthermore, the support of wood burning might make it profitable to export thinnings or logging residues to Finland, and it is questionable whether the feed-in rate works in an efficient way if it leads to increased imports of pulpwood or forest residues from other countries, not increasing the utilization of the Finnish forests. This paper does not examine whether it for Finland would be more profitable from a GDP point of view, to move from the energy-intensive forest industry to a more profitable industry. It is also neglected that a part of the produced paper products are burned with other waste after use, and hence add to the amount of produced energy.

20 5. References Commission of the European communities, Directive of the European parliament and of the council on the promotion of the use of energy from renewable sources. Web publication, cited Bruni, Frank Deep U.S.-Europe Split Casts Long Shadow on Bush Tour. The New York Times. Web publication, cited Ericsson K., Bioenergy policy and market development in Finland and Sweden Energy Policy 32. pp Finlex, Finnish legislation database, Production subsidies for renewable electricity production. Web publication, cited Finnish Forest Industries Federation. Bulletin concerning the feed-in rates for wood-based electricity Web publication, cited umarkkinoihinarvioitava.aspx Finnish Forest Research Institute Statistical Yearbook of Forestry. Web publication, cited Finnish Ministry of Industry Forest industry strategy. Web publication cited Finnish Ministry of Industry, Bulletin on energy policies. Web publication, cited Flyktman M., Kärki J., Helynen S., Sipilä K. and Hurskainen M., Kivihiilen korvaaminen biomassoilla yhteistuotannon pölypolttokattiloissa. Finnish Research Institute. Web publication. Cited polttokattiloissa_vtt.pdf Fordaq Bulletin: Average production costs for pulp according to the Fischer International Database. 14 August.

21 Gullichsen J. and Fogelholm C-J., Chemical pulping Part 1. FAPET. Hänninen S. and Sevola Y., Finnish Forest Sector Economic Outlook Finnish Forest Research Institute. Web publication, cited International Energy Agency, IEA. Statistics, Web publication, cited Malinen J., Potential harvest for wood fuels (energy wood) from logging residues and first thinnings in Southern Finland. Biomass and bioenergy 20(3). pp Metsäliitto Press bulletin: Shut down of the Metsä-Botnia Kaskinen pulp plant. 14 September. Negro, S., Hekkert, M.P., Explaining the success of emerging technologies by innovation system functioning: the case of biomass digestion in Germany. Technology Analysis & Strategic Management 20(4). Pp Porther M., The five competitive forces that shape strategy. Harvard Business Review 79. Savolainen T Suomen teollisuus tilaa kinkkua vain jouluksi. Tekniikka ja talous. 4 December. Statistics Finland Energian hankinta, kulutus ja hinnat. Web publication, cited _tie_001_fi.html Tekniikka ja talous Metsähallitus vaatii puukauppakartellilta satojen miljoonien korvausta. 2 April. Wall S. and Griffiths A., Economics for Business and Management. Financial Times Prentice Hall. pp